A new PwC study shows that the need for change is certain given the challenges tax functions are currently facing and those on the horizon. While a tax function may have been a passive participant in transformational and enterprise efforts in the past, it must now be a strong advocate for change. Tax functions should take ownership of their business case and pursue actions to ensure it is ready for the future.
The tax transformation journey will not be easy, but it is now imperative and the return on investment can be significant. With a thoughtful roadmap, the positive impact on the organisation may be felt for many years to come. The potential benefits will not only reduce above and below the line costs, but will improve company-wide risk management and tax governance, resource management, recruitment processes and many other areas. Through continuous transformation, the tax function will be viewed as not only as a critical and efficient compliance function, but also as an even more valuable strategic organisational asset.
The Paying Taxes study remains unique. It measures the ease of paying taxes across 189 economies by assessing the time required for a case study company to prepare, file and pay its taxes, the number of taxes that it has to pay, the method of that payment and the total tax liability as a percentage of its commercial profits.
The results show that tax policy issues are becoming ever more challenging. There are pressures on tax authorities to raise revenues, to fund social expenditures but also to ensure that their tax system fosters business investment. The business environment is complicated and has the potential to become even more so with complex tax legislation and onerous administrative obligations. It is not surprising therefore that in the most recent edition of the PwC Global CEO survey nearly two-thirds of CEOs around the world say the international tax system is in urgent need of reform and 70% say the impact of tax on their company’s growth is among their top concerns.
For more interesting results and to extract data based on your preferences click here.
There are radical proposals under discussion related to tax and how tax systems operate. It may change the way in which the international tax system works so a closer look today can help preparing our position papers for future legislation.
PwC recently launched Paying Taxes 2014, the eighth edition of their joint annual report with the World Bank and IFC. This is a unique study which investigates and compares tax regimes across 189 economies worldwide, ranking them according to the relative ease of paying taxes. Paying Taxes looks not only at corporate income tax, but at all of the taxes and mandatory contributions that a domestic medium-size case study company must pay. It considers the full impact of all these taxes in terms of both their tax cost and their compliance burden on business.
The study can be downloaded from www.pwc.com/payingtaxes. You can find out how your economy compares with others or you can try out the comparative modeler tool to create your own peer groups from all the economies and regions in the study (tool available at www.pwc.com/payingtaxesmodeller )
As in previous years, the report is expected to be a catalyst for some interesting debate with tax authorities, governments, and business around tax systems and how they can be reformed. Paying Taxes 2014 continues to focus on the trends from the data included in the study. The analysis looks at this from a regional perspective and this year they have taken a more detailed look at the trends for the types of tax within each of the sub-indicators. This has provided some interesting findings around how governments are choosing to levy taxes.
Some of the key findings in this year’s report include:
On average in 2012, it took the case study company 268 hours to comply with its taxes. It made 26.7 payments and paid an average Total Tax Rate of 43.1%.
Reforms in business tax systems continue around the world. The number of economies reforming increased from 31 last year to 32 in the most recent study. The focus continues to be on reducing the administrative burden of the tax system.
All three paying taxes indicators have fallen consistently over the period of the study reflecting the reforms that governments have implemented with a view to making paying taxes easier and so easing the burden for business and government.
While the global average Total Tax Rate has continued to fall in 2012, 14 economies have significantly increased their Total Tax Rate while 14 have reduced it. If the exceptional rate reductions which arise from replacing cascading sales tax with VAT are excluded, the global average Total Tax Rate has started to rise in 2012 (0.2 percentage points).
Over the nine years of the study the Total Tax Rate attributable to profit taxes has fallen faster than for the labour taxes borne by the case study company so that labour taxes are now the largest element of the Total Tax Rate
On average consumption taxes have always taken the longest time to comply. Over the nine years of the study the time to comply has improved most for labour taxes.
Central Asia & Eastern Europe is the region that has seen most reform over the nine years of the study, with the largest fall in the average for both the time to comply (by 220 hours) and the number of payments (by 25).
The highest average tax cost is in Africa, amounting to 52.9%, the lowest is in the Middle East where the average is 23.7%. Over the last nine years the largest falls in the Total Tax Rate have been in Africa (by 16.0 percentage points), Central Asia & Eastern Europe (by 15.7 percentage points) and the Middle East (by 15.6 percentage points).
The highest number of hours to comply is found in South America with 618 hours, the lowest is in the Middle East with 159 hours.
The most payments made are in Africa amounting to 36.1 followed by Central America & the Caribbean with 33.7. The fewest payments are made in the North America where the company has to comply with only 8.3 payments. This is largely due to the ability of companies to file and pay taxes online.
In this year’s report PwC’s focus is on the key themes revealed by the latest study, and has put it in the context of the eight years of data they have compiled since the inception of their Paying Taxes survey (2004 – 2011). They’ve analysed this data both at the global and the regional level, and included additional analysis which compares the Paying Taxes indicators with some broader macroeconomic indices of growth and investment.
The economies in Central Asia & Eastern Europe have led the charge over the period of the study to improve their tax compliance procedures and also to reduce their tax rates. Economies in this region have shown the largest fall in both the time to comply (200 hours) and number of payments (22.2) and apart from the Middle East have the largest fall in the Total Tax Rate (12.6%).
While the Total Tax Rates for Africa still appear to be high, if the three countries with cascading sales taxes are excluded then the average falls to a level which is just above the world average, leaving South America as the region with the highest Total Tax Rates. Therefore, the highest number of payments is now made in Africa (37.0) whilst compliance continues to take longest in South America (619 hours).
The developed economies of Europe and North America not surprisingly have the most efficient tax systems but Total Tax Rates can be high, driven in many cases by numerous labour taxes and social contributions. The lowest number of payments is now made in North America (8.3) followed by the EU & EFTA (12.8).
It is not surprising that the economies in the Middle East feature so prominently in the top jurisdictions of the Paying Taxes indicators. This can largely be attributed to the relatively few taxes levied on the case study company and a reliance on other sources of government revenues. The expectation is that this will change as new revenue raising measures are introduced.Middle Eastern states have the lowest average Total Tax Rates (23.6%) and the lowest time to comply (158 hours).
For a closer look into your country’s tax compliance and a benchmark against other countries have a look @ http://pwc.to/XBSTiN
Understanding what drives the amount of corporate income tax paid by companies has become increasingly important in recent years as governments adapt their policies to encourage growth, while recognising the need to raise revenues to fund social investment programmes and to repair public finances in the wake of the global economic downturn. It is important to recognise and understand the impact of tax policies on the revenues received by governments, revenues that governments rely on to enable them to discharge their obligations to provide funding for infrastructure, education and public health. This includes the need to ensure that the tax system provides an economic environment which fosters economic growth, helping to increase the size of the economy from which revenues can be drawn.
For companies, this has become important as they come under increased scrutiny over how much tax they pay and whether they are paying the ‘right amount of tax’. For companies the amount of tax that they pay represents a key element of the contribution that they make to the economies in which they operate. Taxes are a cost that has to be managed like any other cost, and the level of taxes paid is one of a number of factors that are taken into account when making decisions on where, when and how much to invest.
Over the last seven years PwC has worked with the World Bank on the “Paying Taxes” study which measures and compares how easy it is to pay taxes in 183 economies around the world using a case study company with a standard fact pattern. The study looks at all of the taxes that a company might pay including corporate income tax. It showns a consistent downward trend in the statutory rates of corporate income tax which have been applied over the last seven years, as governments have looked to ensure their tax systems remain competitive in a globalising economy. Another consistent feature of the results of the study is that the amount of corporate income tax actually paid can often be different and on occasions very different from the amount derived by simply multiplying the accounting profit by the headline rate of corporate income tax.
The results are quite striking
They show how the downward trend in statutory rates has resulted in those now applied falling within a fairly narrow range. More than half of the economies around the world have a statutory corporate income tax rate between 15% and 30%. And as regards the rate of tax actually paid by the company, the study identifies 40% of economies which make adjustments which increase the amount of tax paid while 60% reduce it. PwC’s analysis identifies the key reasons for these differences and provides some interesting insights on a regional basis and for a selection of individual economies.
It will be interesting to see how corporate income tax regimes around the world continue to develop, and whether the need for governments to demonstrate that their systems are competitive takes priority over the need to generate much needed funds.
International Transfer Pricing 2012, now in its thirteenth edition, is an easy-to-use reference guide covering a range of transfer pricing issues in nearly 70 countries worldwide. It explains why it is vital for every company to have a coherent transfer pricing policy which is responsive to the rapidly changing markets in which they operate. The book not only shows why sound transfer pricing policies should be developed, but also why such policies need to be re-evaluated regularly. It offers practical advice on a subject where the right amount of effort can produce huge benefits in the form of a competitive and sustainable tax rate, and leave the company well positioned to defend against aggressive tax audits.
Many governments in emerging markets mistakenly believe that they can reduce the level of informality by forgiving past tax debts of companies that come forward. Turkey, for instance, has had ten tax amnesties since 1963—one nearly every four years—and five social-security amnesties since 1983. Their provisions included the right to base the payment of past taxes on historical values of Turkey’s currency, the lira. Given the country’s high inflation rates, this approach greatly reduces the amount businesses have to pay. A McKinsey study shows that governments make ongoing enforcement more difficult with such measures, since companies wait for the next amnesty before coming clean.
In developed countries, the penalties are usually two to three times the amount of the evaded taxes, coupled with imprisonment if the evasion is persistent or involves more than a set amount. Tax evaders in emerging markets often get by with a slap on the wrist; in Turkey, for instance, the fine for VAT evasion is less than $20.
Probably corruption has also something to do with how evasion is considered in emerging economies. What do you think?
Neil Tipograph wrote an extensive article in “The CPA Journal” to provide guidance to tax professionals for individuals who invested directly with Bernard L. Madoff Investment Securities, LLC. More specifically, he addresses the steps to be taken by tax professionals and their clients during 2009 related to the preparation of 2008 federal income tax returns and prior-year amended returns.
Tax professionals can serve an important role in assisting individuals victimized by Madoff’s alleged Ponzi scheme. They can help clients accumulate information for the claim form to be submitted with the Madoff trustee and they can prepare amended tax returns for all open years that will effectively reverse the phantom income reported by Madoff during the open years. Moreover, they can prepare 2008 returns claiming a theft loss deduction for some portion of the phantom income reported on tax returns closed by statute.
Madoff’s alleged Ponzi scheme is a developing story with very few facts known at this time. As details are uncovered, the recommendations provided by Neil may also change.